Tax Advantages of Employing Your Children - John R. Dundon II, Enrolled Agent
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Tax Advantages of Employing Your Children

Tax Advantages of Employing Your Children

Payments for the services of a child under the age of twenty-one who works for his or her parent whether or not in a trade or business, are not subject to federal unemployment taxes (FUTA). These exceptions are not the case with a corporation (C or S), even if the corporation is completely controlled by the child’s parents. Significant tax shelter is provided through the employment of children in a sole proprietorship or partnership by shifting income to persons in lower tax brackets. A child is allowed to earn the amount of the standard deduction tax-free every year ($5,700 in 2010). Above that level, the child can receive income and pay tax at the lower ten percent and fifteen percent rates.

Of course, the employment arrangement must be bona fide, and the compensation must be appropriate for the age and skill set
of the child. But as the child matures, it is reasonable that compensation would increase. For a parent who would like to put money away for a child’s education, the family business still provides a great opportunity.